By L.Bolormaa
The very first speech made by the new Prime Minister, Ch.Saikhanbileg, gave people hope that the Government under his leadership indeed has a well thought out “recipe” to tackle the economic crisis. He explained the true nature of the crisis with winning frankness and clearly listed and prioritised the goals for today, tomorrow, as also for the long run. I would say the audience paid more attention to the medium- and long-term goals and was struck by the leader’s ordered policy and planning.
Since any overnight improvement is hardly possible, the country’s hopes rest on the success of these medium- and long-term plans of the Government. The earliest possible breakthrough he referred to was “establishment of a SWAP agreement with the Central Bank of Russia in December and beginning fuel trade in ruble”. Here lies the difficult situation Mongolians might face today and tomorrow. The Central Bank of Russia, or more correctly, V.Putin, will not say ‘yes’ that easily. Already during his visit here in September, he promised to study ways leading to a positive resolution of the issue, but there has been no public announcement of any progress.
Meanwhile, one fears that the country may not have enough dollars to pay for import of gas, medicines, food and other neccessities. I have spoken bluntly about the simple truth. As recently as in March, 2009 we ran out of money even to pay pensions and salaries. With the ruble weakening steadily, will Russia agree to make it the currency of trade with Mongolia? Currently the country trades in ruble only with China.
It is essential to stay calm in a crisis, and not panic. The situation will appear even more difficult if people cannot hold on to something, rather than panicking blindly. What hopes will the Prime Minister give us? What decisions will he make today and tomorrow?
The Government’s immediate concern is to get the revised 2015 budget approved, something that did not follow the last two discussions on it. Ch.Saikhanbileg has said in the the State Great Khural that MNT 1 trillion has to be lopped off the proposed budgetary expenses. This is a huge amount but there really is no choice. If this can be done, the Government will be able to raise long-term, low-interest loans from outside. Reducing the present planned expenses of MNT 7.6 trillion to MNT 6.1 trillion will mean a budgetary expenditure growth of -6 per cent. This figure is uncannily close to what happened in the 2009 crisis.
Memories come rushing back. In March 2009, when the budget showed a deficit, the Government requested the International Monetary Fund for a loan of at least $300 million. Individual countries came forward with offers of this money, led by China and Qatar. Soon after, there was talk of getting a soft loan of $300 million from Russia. S.Bayar, Prime Minister at the time, submitted the proposal to the State Great Khural for discussion, but the MPs didn’t approve of the loan conditions. These were not made public, but it has always been believed that Russia’s quid pro quo for the loan was participation in the Tavan Tolgoi tender selection.
Considering the high risks of bilateral borrowing, the Government approached the IMF and accepted its terms for a Stand-By programme, signing an agreement for a $229.2-million loan on April 1. The programme ran for 18 months. The loan agreement enjoined the Government to “restrict the growth of budgetary expenditure and reduce it to -6 per cent”. The existing budget was amended and expenses cut to MNT2 trillion and 322 billion. Since something very similar will be needed this time again, the Prime Minister must find a skilful Minister of Finance capable of making huge slashes.
Several other points in the PM’s speech drew our attention, one of them being the “bail-out programme”, a term entering the popular lexicon during the financial crisis year of 2008. Only two days after Lehman Brothers declared bankruptcy on September 15, 2008, President Bush submitted the first phase of a bail-out programme to the House of Representatives.
Things moved fast during the crisis. Many banks faced bankruptcy with loads of worthless mortgages and no cash in hand. The US Government gave $700 billion to banks under the Troubled Asset Relief Program (TARP), introduced by Bush and continued by Obama.
The general mechanism of this financing programme is similar to that of the now proposed three-sided cooperation between the Mongol Bank, commercial banks and Ipotek Corporation. The Government will raise funds and give them to commercial banks through the Mongol Bank. Eventually new business loan packages like the 8% mortgage loan will be held by commercial banks. These can then be traded at the Stock Exchange as a kind of bond to raise funds.
Companies in Mongolia no longer have capital and most have run up huge debts. As Saikhanbileg elucidated his bail-out plan, a mechanism will be created to allow a company to borrow against its stocks. The Bail Out Program in the USA was strongly criticised as too much Government involvement in the market. We can expect difficulties in implementing this somewhat similar programme in Mongolia also.
Other medium-term hopes come from FTA with Japan, which is expected to be finalized soon and investment and concessions made between the Mongolian government private companies.
Ch.Saikhanbileg has raised hopes, but the media hype over them is uncalled for. The Prime Minister has no magic wand and has not promised easy success. In fact, things are likely to get much worse before they start getting better, and the coming days will be very difficult for us.